Friday, February 11, 2011

Income Investor First Steps

First step for new (young) investors: understand that investing means you can be a lender or you can buy an ownership position in something. This blog post will concentrate on being a lender.

As a lender you buy a bond and the borrower promises to pay you interest and to return your principal when the bond matures. The coupon is the interest rate and the date you get your principal returned is the maturity date. Most bonds pay interest every 6 months but interest accumulates on a daily basis. Every day you own a bond, you will get credit for the interest.

Individuals, governments and companies need to borrow money and investors can be the lender. A wise investor only lends to a company or government that can pay them back. For the new investor in 2010 lending your money to a company is an option and to do this you would buy a bond. You only need about $2,000 to buy a corporate bond.

If you lend your money to a corporation, they will pay you the interest on the bond and return your principal when the bond matures. Currently in 2011, a quality company's bond with a maturity of 7-10 years will pay you about 4-5% interest rate.

Right now, corporate bonds are expensive but you will get more than you can get from putting your money in the bank or in your mattress.

Municipalities like States, Cities, and Counties etc. also borrow money and you can be the lender. Usually these entities pay you interest that is tax-free. Since so many municipalities are financially unstable, you can buy bonds that pay quite a lot of interest but then they are not as safe. If you pay a lot of income tax, carefully selected municipal bonds are a good choice.

I will be preparing a post on how to buy a bond. Income investors should learn about how to buy a bond because inflation is in the air and bonds should become more affordable in the future. Be prepared and learn now about lending your money.

Very Truly Yours,

TheMoneyMadam